Battles with online retailers, particularly Amazon.com, are raging from New York to North Carolina, Oklahoma to Colorado and Texas to, now, California. This is good news for lawyers but no one else. How has it come to this? How have so many states ended up in costly confrontations with popular retailers?

Part of the answer is that states are growing desperate. It’s bad enough that a soft economy has shrunk government revenues and forced draconian cuts in services. What’s particularly maddening is that developments in technology, in tandem with obsolete federal law, are permanently shifting major portions of retail sales into an online tax-free haven. Buy a book at the corner bookstore and you pay a sales tax on the transaction; order it online from Amazon and you pay none.

Make sense? Many, many states – and more all the time, including so-called “red states” – don’t think so.

Texas, for instance, has been embroiled in a showdown with Amazon over the hundreds of millions it says the online retailer should have collected from state residents in sales taxes. Such legal battles aren’t necessary. Congress has the power to level the playing field and, in essence, require consumers to pay sales tax whether they shop on main street or online. Legislation to this effect has been introduced in Congress several times over the years, and now is the time for Congress to act.

Why, you may ask, do we need an act of Congress in the first place? What exactly is the problem?

For much of our history, the primary tax was the tax on property, such as houses. If you owned a house, then it seemed fair to ask you to pay for things like police and fire protection. The property tax is still collected, but has been in decline – at least in part because much of the wealth in our society is no longer a matter of physical property. Think of stocks and bonds, and the income they produce. And so we have the income tax, which is the main tax at the federal level and also in many states.

There is also, of course, the sales tax, which you, the consumer, generally pay when you purchase an item. Why impose a tax when a transaction occurs? The theory is that when you buy something you are consuming as you wish thanks (in part) to the safe and orderly market provided to you by the state’s firefighters, police officers, courts and so on.

We consumers could all be required to calculate the sales tax and remit the amount due to the state every time we purchased an item, but it doesn’t take more than a couple of seconds to realize that it makes more sense for states to require retailers to collect and remit the sales tax. This is worth repeating: The sales tax is essentially a tax on consumers that is collected and remitted by retailers.

Yet so long as some states did not have a sales tax, consumers could purchase items in states without a sales tax and then bring the items back to their home state with a sales tax. In such a scenario, home-state merchants lose sales and the home state loses the sales tax revenue. Enter the “use tax.” The use tax is the sales tax that a consumer must pay on a good purchased out of state and on which the consumer has not paid sales tax; it is levied at the same rate as the sales tax. We consumers must pay the use tax on our untaxed out-of-state purchases whether the retailer collects the tax or not. There is even a line on the income tax return in California in order to facilitate our paying the use tax. Yet most people do not even know about their use tax obligation and actual compliance with this requirement is very low (the most recent estimate is that Californians pay 1.4% of their use tax liability).

This is the revenue that states would like to collect by requiring out-of-state retailers, like Amazon, to collect the use tax. In money terms, this dispute is estimated to be worth about $9 billion to states nationwide and about $1 billion to California; $1 billion is about as much as was cut from the UC and CSU systems this year (roughly a 20% cut of state support). States reason that this is not just about their lost revenue, but about the competitive threat to their in-state retailers. Think of it this way: Governments’ failure to collect the use tax from online retailers hovering digitally beyond the state line amounts to a subsidy for them to beat in-state competitors on price.

Current federal law makes it difficult to impossible for states to force out-of-state retailers like Amazon to collect the use tax. Remember, this is not really a dispute about taxing Amazon – the tax, after all, is owed by the consumer. Nor is this an attempt to raise taxes; the tax is already owed.

If out-of-state companies cannot, as a matter of law, be made to collect the use tax, then what are the battles about? First, the battles are about prodding Congress to change the law because the law is outdated. Second, the law, which dates to 1992, is ambiguous, especially in the Internet era. The current rule is that an out-of-state merchant like Amazon does not need to collect the use tax unless it has “physical presence” in the state imposing the use tax collection obligation. Amazon argues that it has no obligation to collect taxes in the majority of states, including California, where it has no stores or offices.

Many states disagree with Amazon’s narrow definition of “physical presence.” In particular, some have taken the position that Amazon’s relationship with local retailers (so-called affiliates) qualifies as the physical presence of Amazon itself. Amazon disagrees, but has ended some affiliate programs in states that seek to make it collect the use tax on the basis of such in-state affiliates. Amazon argues that this is a self-defeating move by states, as it hurts their own (tax-paying) businesses wishing to affiliate with the online behemoth.

Leaving the affiliate issue and other legal theories to one side, the current situation is especially galling to state tax collectors because many other major online businesses, businesses that also have physical stores, like Barnes & Noble, do collect the use tax on their online sales. If Barnes & Noble can collect the use tax, surely Amazon can too.

Congress needs to act. What the example of Barnes & Noble illustrates is that online retailers can collect the use tax without much difficulty, and so whatever protections to remote sellers the “physical presence” rule offered in 1992 are no longer needed. Furthermore, this is about federalism. Only states collect the sales tax. As online sales continue to grow, Congress is essentially eviscerating one of the primary means states have chosen to raise revenue. We should remember that if Congress did force major retailers like Amazon to collect the use tax, then any state would still be free not to have a sales tax, or to lower the sales tax, or to choose to exempt certain purchases from the sales tax, including online purchases. But states would have the choice.

Darien Shanske is an Associate Professor at UC Hastings College of the Law.

*Photo courtesy of Akira Ohgaki.